As the world’s second largest economy and the contributor of 15% of global GDP, the volume of discussion surrounding China’s market meltdown is warranted. With stocks down 8.5%, the Shanghai Composite’s worst single-day fall in since 2008, waves of uncertainty are rippling across the globe: the Japanese Nikkei fell by 4.6% and the German DAX fell by 20%. However, much of the recent discussion has largely ignored the potential long term causes of the Shanghai Stock Exchange’s ‘Black Monday’. Whilst the devaluation of the yuan earlier this month by the People’s Bank of China’s (PBOC) is perhaps the most immediate cause, there are larger underlying factors, such as the role of the government, China’s changing population and its transitioning economy, to consider. In light of these, ‘Black Monday’ feels less like a global crisis and more like the symptom of an unhealthy economy.
China’s changing population
In 1980, the Communist Party of China (CRC) introduced the One-Child Policy to quell huge population growth and to help combat the famine that permeated Mao’s China. The repercussions of the controversial policy can be seen today when we consider its present workforce. China’s labour supply is facing a huge contraction: by 2030 one quarter of China’s population will be over 60 whilst it is estimated that since 1980, the One-Child Policy could have meant between 100 and 400 million fewer people being born. As the Chinese middle class is growing, so too are its aspirations. There are unprecedented rises in rural-urban migration as the desire for better jobs spreads. Fewer people are willing to work the long hours for the low wages offered by manufacturing and more people are looking to cities for work. Moreover, with theories such as the 4-2-1 phenomenon and ‘Little Emperor Syndrome’ come growing concerns on the pressures, calibre and volume of China’s future workforce. These concerns have become ever more relevant as industrial activity has begun to slow and the need for major reforms becomes more urgent.
China: an economy in transition
China’s booming economic miracle has been gradually decelerating for some time and on Monday 24th August, the markets in Shanghai closed and it ground to a halt. For three decades increases in labour, capital and productivity stimulated economic growth at an average of 10%. In lieu of a swelling economy and its shrinking workforce, the marginal products of capital and labour have plateaued. Moreover, in the past a strong trade surplus has allowed the PBOC flexibility with its exchange rates. However, as the frequency with which the PBOC manipulates its exchange rates increases, their credibility as public policy makers decreases. As it transitions from an investment economy to a consumption economy a rise in domestic consumption is integral if China wishes to avoid a Japanese-style stagnation. So, what can the government do to stimulate domestic consumption? It needs to alleviate the pressure to save on its working population. If the PBOC were to provide the much needed lender and property reforms and other supports, like health insurance, were made available then China’s pre-retirement population would have more income available for domestic consumption.
In China every aspect of life is a political matter. The government stringently monitors the Shanghai Stock Exchange and often intervenes with market mechanisms to set favorable exchange rates: in recent months the PBOC have ordered state-owned banks to sell dollars and buy yuan. Moreover, despite the weakening of the Chinese economy and the strength of the dollar, the PBOC prevented depreciation. The authorities can prevent investors from selling stocks and often tells corporations and local governments to borrow. Unlike most of the world’s large economies, China’s yuan is not a floating currency and thus is not traded freely. Although this does offer an explanation to China’s Black Monday it is important to remember that the Shanghai stock market is relatively young and it lacks experienced organisations as investors. There are also sanctions in place that hinder foreign ownership: foreigners only own 2% of stocks.
Last week’s events have put the government’s competence to manage its market fluctuations under the spotlight. China, not just as an economy, but as a whole is going under huge changes and it is the government’s responsibility to evolve accordingly. ‘Black Monday’ may not be a repeat of the Great Recession nor the 1997 Asian Crisis but it must not be overlooked. China’s economy is sending it a very clear message: something isn’t right.